American Luxury

Are houses actually unaffordable?

I’m a big fan of revealed preferences. People will often tell you that they want one thing, only to choose the opposite when they get the chance. Sometimes they lie, but often they just don’t know themselves. They have one narrative they tell themselves about who they are, but that narrative is biased by who they want to be, or who they used to be, or who they think others want them to be. Actions don’t tell you everything. A person may act cowardly their whole life but then show surprising courage in a real emergency. Generally though, if you want to judge a person it’s more accurate to judge their actions than their words. I’m reminded of this while listening to people complain about how unaffordable modern living has become. There are influencers all over the place explaining how much easier life was for baby boomers. You probably hold many of these views, I mean just look at what’s happened to housing prices. Look at the cars. Everything is unaffordable now! The problem is that if we actually look at what consumers are DOING, the narrative falls apart. In short, there has never been a better time to be an American by any material standard.

First, let’s talk about some numbers. We can talk about changing incomes and prices, but if we want to really compare apples to apples it’s helpful to look at the share of household income that goes to things like food and housing.

Source: https://www.bls.gov/opub/mlr/2001/05/art3full.pdf

You can clearly see here that what we spend on food and clothing has dramatically decreased through the decades, while housing spending has grown modestly and transportation spending has grown dramatically. That basically comes down to car ownership being quite rare in 1917 and ubiquitous by 1970. Americans could afford to buy cars because they were spending less on food and clothing, so this is one example of increasing luxury over time. Here are more recent numbers:

Source: https://www.bls.gov/news.release/cesan.nr0.htm

Different studies use different methodologies for collecting data so we have to take comparisons here with a grain of salt. But it appears that since 1986, household spending on food, housing, transportation, and clothes have ALL declined. Taken together, these things accounted for 88.6% of a household’s budget in 1917, 83.9% of a household’s budget in 1950 and only 65.4% in 2023. That’s a dramatic improvement since the time that many consider the peak of the American economy. We’ve never had more money to spend on frivolities, as everyone who walks around with a $1000 phone in their pocket should readily understand.

Need another metric of our luxury? Americans in 2016 flew an average of 202 miles per 100,000 persons. In 2023 it was 227, a pretty big jump in just 7 years when you consider that a global pandemic disrupted all travel between those years. And at the same time that we have spent less of our income on food, we are going to restaurants more than ever! Organic and other types of expensive health foods are booming. This isn’t a society that is pinching pennies at the grocery store so that we can afford our growing rent. It’s a society that can splurge on health-food takeout delivered to their doorsteps and still spend less of their income on food than their parents did.

Now housing and cars really have gotten more expensive since 1950, we spend more of our income on them. But that doesn’t tell you the whole story. Have you ever watched a co-worker drive an incredibly expensive car into the parking lot and wondered, “how?” Obviously you know they don’t make more money than you so how do they afford it? Do they have a rich relative who recently passed away? Probably not, probably they just decided to spend a ridiculously high percentage of their paycheck on a car. That’s their choice. Some people spend ridiculously on their house. So if we want to compare living standards over time we need to see what kind of houses people are choosing to buy. And this is where revealed preference shows us what’s really going on. In 1950, the average single-family home size was 1,065 square feet. By 2015 it was 2,687. Even these numbers don’t properly represent the luxury of the modern American because those smaller houses used to have more people living in them. In 1950, the average resident had 292 square feet of living space. By 2010 it was 924. We haven’t just doubled the size of our homes, we have more than tripled the size of our living spaces. Add to that the fact that not a single home in 1950 had air conditioning or granite countertops or master bathrooms. Cars have gone the same way, getting bigger and fancier every year. Parents don’t want minivans, they want massive SUVs. Automakers are canceling sedan models and pumping out more trucks than ever. It’s hard to buy a car these days that doesn’t come with a backup camera and lane assist and a computer that brakes for you.

When I hear people complain about the cost of cars and houses I always remember these facts and I want to scream into the void. It’s not that cars are too expensive, it’s that no one wants to buy a cheap car so automakers stopped making them. If there was a market for $10,000 cars that don’t even have power windows or locks, companies would build them. If there was a market for 800 square foot houses, contractors would build them. Modern living is expensive yes, but it certainly isn’t unaffordable.

The housing picture is of course complicated by NIMBYism. City planners and grouchy citizen groups have conspired to prevent enough housing from being built, and the results have been large increases in homelessness and low-income residents getting pushed further and further away from the places they work. Perhaps this is the reason that the trend of ever-increasing house sizes has reversed in the last 8 years or so. On the other hand, Americans are having fewer kids than ever and the popularity of tiny houses reveals that there is some cultural change away from larger houses being desirable. The fact that housing costs as a percentage of income declined from 2020 to 2023 indicates to me that this still might be less about affordability and more about consumer preferences.

I’m not denying that inflation was painful, it certainly was. For a very brief period of time our purchasing power went down. But since then we have had steadily rising wages, especially at the bottom of the income spectrum. Income inequality is going down. We should be celebrating! But good news doesn’t go viral. The important thing to understand about inflation is that it doesn’t go down unless you change your decisions. In 2020 everyone complained about how expensive everything was but then THEY KEPT BUYING THINGS. If they had stopped buying, the things would have gotten less expensive. If you choose to pay a now higher price for a thing you don’t absolutely need, then you are choosing to live in an inflationary world. As a parent, another affordability issue I understand dearly is day care. I spend more on day care than I do on my mortgage. But complaining about the expense of daycare is the height of luxury. You only have daycare costs if both parents make more money than is spent on daycare. Otherwise, you wouldn’t be able to afford it and one parent would stay home. It’s an expense you ONLY have to pay if it’s affordable.¹

If there is one thing I can’t stand in life, it’s whining. I was raised in a household where whining was strictly forbidden, and I know many other people in my generation were raised with the same values. But social media, particularly TikTok and Instagram, have created an incentive structure for whiners to be rewarded. A video complaining about how life is so much worse for millennials than boomers will get far more views than a video that explains how much better off we are. The result is a society where everyone thinks that everything sucks all the time. If we want to be a serious people we should be happy with what we have, thankful that we are so much better off than any group of people in human history. We are sitting in the lap of luxury. Hopefully our voters realize that before they decide everything is so bad that the only thing left to do is tear it all down and start over. That’s a future we really can’t afford.

1. Of course, that’s not true of single parents and that is absolutely a tough position to be in. But most of the time single parents get child support and/or have family members to help so it’s an issue on the margins. The overwhelming majority of people complaining about the cost of childcare are not single parents.